Michael Gray, CPA's

Real Estate Tax Letter

December 12, 2014

© 2014 by Michael C. Gray
ISSN 1930-0387

A monthly report focusing on tax issues for the homeowner and real estate investor.

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Make your year-end planning appointment now.

Michael Gray will have very limited availability for the rest of 2014, so make your year-end planning appointment now. Call Dawn Siemer Monday, Wednesday, Thursday or Friday at 408-918-3162.

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Special offer for Real Estate Tax Handbook, 2014 Edition.

The Real Estate Tax Handbook, 2014 Edition is being printed right now. Some updates that are included are the new rules on repairs and capitalization, new rules for materials and supplies, federal estate planning changes, and the 3.8% net investment income tax. As a holiday and introductory offer, you can order a copy for $29.99, which is half price, plus $3.50 shipping and handling and, for California residents only, $2.93 sales tax. This offer expires December 31, 2014.

Your can use the form at the end of this newsletter to mail or fax your order or call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays, Thursdays or Fridays to order by telephone.

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Michael Gray interview on Real Estate Live.

Michael Gray will be a guest on a radio show, Real Estate Live, on Thursday, December 18 KDOW, AM 1220 from 2 - 3 p.m. Pacific Time. You can also listen to the show online at www.kdow.biz.

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Live presentation by Michael Gray, CPA for tax professionals.

Michael Gray will give a lunchtime presentation for the Silicon Valley San Jose chapter of CalCPA on January 15, 2015. The subject is "Survey of Lifetime Gift Planning and Form 709 - Part 1. (Part 2 will be presented on June 18.) The investment is $20 for members and $30 for nonmembers. Here is a link with the details. https://www2.calcpa.org. Call Dawn Siemer at 408-918-3162 for a paper flyer. You can also register by calling Stephanie Stewart at 408-983-1122.

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New Dan Kennedy book released.

Business and marketing consultant Dan Kennedy has released the second edition of his book, No B.S. Ruthless Management of People and Profits. Although the management function of a business isn't as fun as marketing, it's essential. In this book, Dan discusses essential control numbers for a business that aren't included in financial statements. I highly recommend all of Dan Kennedy's books for small business owners.

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Standard mileage rates released for 2015.

The federal standard mileage rates have been released by the IRS. The business rate is increased from 56¢ for 2014 to 57.5¢ for 2015. The medical rate is decreased from 23.5¢ for 2014 to 23¢. The charitable rate doesn't change; it's 14¢.

(Notice 2014-79.)

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Congress tries to extend tax breaks as the clock runs out.

A number of tax benefits, including the $500,000 limit for expensing business equipment and bonus depreciation for new equipment, expired December 31, 2013. Congress is currently trying to pass a one-year extension for 2014 for many of these provisions. They have less than two weeks before Congress adjourns. Time will tell. Meanwhile, we can't count on the breaks when doing tax planning.

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Personal use limits deductions for a vacation home.

If a vacation home is used more than 14 days during a taxable year by the homeowner, most of the tax deductions for the home are limited under Internal Revenue Code Section 280A to the income from the property. The IRS challenged deductions for a couple for excessive personal use. The Tax Court agreed with the IRS that use by a relative was personal use by the taxpayer when the taxpayer couldn't produce documentation that fair market rent was received from the relative. Days when the taxpayer stayed in the unit principally to perform repairs and maintenance were not personal days.

(Malssen and Kiley v. Commissioner, T.C. Memo 2014-236, November 20, 2014.)

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Mortgage deduction denied - didn't own the home.

Lourdes Puentes' brother, Benjamin, became unemployed and was unable to pay the mortgage on his residence. Loudes made the payments and claimed a tax deduction for the mortgage interest on her 2010 personal income tax return. Benjamin was the owner on the deed for the residence. The Tax Court upheld the IRS in disallowing the deduction. In order to deduct mortgage interest for a personal residence, you must own the residence. (The Tax Court made the same ruling before for her 2009 income tax return.)

(Puentes v. Commissioner, T.C. Memo 2014-224, October 27, 2014, T.C. Memo. 2013-277, December 9, 2013.)

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California issues draft of like-kind exchange form.

The California Franchise Tax Board has released a draft of Form 3840, California Like-Kind Exchanges. The form is required when real estate located in California is exchanged for real estate located out of state in a tax-deferred Section 1031 exchange. Taxpayers will be required to submit the form for the year of the exchange and for subsequent years until the gain is recognized or the owner dies, effective for tax years beginning January 1, 2014 and thereafter. It will also be required for replacement property if there is a subsequent exchange of the property. This new requirement will increase the compliance costs for exchanges involving out-of-state property substantially.

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Non-group medical insurance benefits may not qualify for exclusion for employees.

The IRS says that, effective January 1, 2014 under Health Care Reform, the only way employees can exclude employer-provided medical insurance from their wages is when the insurance is provided through a group policy. Many small employers may have thought that if they have no more than 50 employees, they aren't subject to the health care reform changes, but that is an error. For employers with more than 50 employees, a $100 per day ($36,500 per year) per employee penalty can apply, which the IRS can waive for reasonable cause. Since W-2s will soon be prepared for 2014, discuss this matter with your tax advisor and medical insurance provider now if your business provides non-group (individual policy) medical insurance for employees.

(Notice 2013-54.)

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Possible deduction for partial asset disposition for 2012 or 2013.

When a portion of an asset was replaced in the past, such as replacing a roof of a building, you weren't able to deduct the undepreciated cost of that portion of the building. Under final regulations adopted by the IRS during 2014, a new election is now available to get that write off in the year of replacement. Although the regulations generally are effective for 2014, taxpayers may elect to retroactively apply them for 2012 or 2013. If you had an event like a roof replacement for a building during 2012 or 2013, see your tax advisor about filing an amended income tax return.

(T.D. 9689.)

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Non-resident corporation that was a minority investor in a California LLC wasn't subject to California tax.

A California Superior Court ruled that an out-of-state corporation that owned a 0.2% interest as an investor in a California limited liability company (LLC) wasn't "doing business" in California, and therefore not subject to the $800 minimum franchise tax.

The court said that since the interest was solely held as an investor and the corporation wasn't involved in managing or operating the LLC and was an Iowa corporation with no business activities or physical presence in California, it didn't have sufficient connection to California to be subject to tax.

The Franchise Tax Board will probably appeal this decision. Meanwhile, out of state corporations that have paid California taxes when their only connection to California is as a minority passive investor in a California LLC should file protective refund claims.

(Swart Enterprises, Inc. v. California Franchise Tax Board, November 20, 2014, Fresno Superior Court, No. 13CBCG02171.)

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Fourth quarter calendar year corporate estimated tax payment is due December 15.

The final 2014 estimated tax payment for calendar-year corporations is due December 15, 2014. Not all corporations can base their federal estimated tax payments on the previous year's income tax return. For example, new corporations and corporations that had no tax liability for the previous year must compute their estimated tax using the current year's facts. See your tax advisor for assistance.

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Fourth quarter estimated tax payment for non-corporate taxpayers is due January 15.

The final estimated tax payment for individuals and calendar-year estates and trusts is due January 15, 2015. Remember California taxpayers with taxable income of $1 million or more must pay their estimated taxes using the current year's facts. Watch the alternative minimum tax. See your tax advisor.

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Watch FUTA adjustment on year end report.

California, among other states, has a cutback in its state credit for federal unemployment taxes. That means additional payments of up to $84 per employee will be due with Form 940. Be sure this adjustment is done with your year-end report for 2014.

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Calendar year accrual basis corporations should pay related parties by December 31.

In order to currently deduct expenses due to certain related persons, accrual-basis corporations must pay them by the year-end. These include wages, bonuses, interest expense, rent, etc. Be sure to review the status of these items with your tax advisor by December 31.

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Do you have unrealized capital losses?

Since the stock market has done so well, fewer individuals are holding stock that has declined in value. If you do, consider selling it before the end of the year. The capital losses can offset any capital gains that you have plus an additional $3,000 can be used to offset other taxable income. Remember the wash sale rule. The loss is disallowed if you buy the same security during the period from 30 days before to 30 days after a sale at a loss.

This strategy is especially important for high income individuals who are subject to the 3.8% net investment income tax.

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Estates and trusts should plan distributions.

The increase in the maximum federal income tax rate to 39.6% and the 3.8% tax on net investment income hit estates and trusts especially hard. They apply when the undistributed trust income exceeds $12,150. If possible, the income of the estate or trust should be distributed to beneficiaries before the year-end, since the threshold for these taxes is much higher for individuals. (The income of some trusts is automatically considered distributed. See your tax advisor.) An election is also available to treat distributions made during the first 65 days of the following year (for example, January 31, 2015) as distributed for a taxable year (for example 2014).

In most cases, capital gains don't qualify for the distribution deduction. See you tax advisor.

The beneficiaries should be involved in this decision and be informed about the additional income to be reported on their income tax returns (in writing) and to avoid unpleasant surprises.

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Business retirement plans for calendar-year businesses should be in place by December 31.

In order to make contributions for 2014, business retirement plans such as 401(k) plans and profit sharing plans for calendar-year businesses must be in place by December 31. Employee contributions to a 401(k) plan must also be paid by December 31. If yours isn't in place yet, contact your retirement plan advisor immediately.

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Should you buy business equipment before December 31?

The expense election for business equipment purchases is now $25,000. Congress might enact a retroactive increase. Consider making your business equipment purchases before the end of the year. See your tax advisor for details.

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Remember to "reset" payroll on January 1.

Software providers will issue updates including the new payroll tax tables as of January 1, 2015. Be sure you have installed those updates before processing your first payroll for 2015.

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Should you make additional tax payments before December 31?

State estimated tax payments and early property tax payments made by December 31 are generally tax deductible for the regular tax. However, many people are finding they are subject to the alternative minimum tax. Deductions for taxes (and miscellaneous itemized deductions) aren't allowed for the alternative minimum tax, so there could be no benefit for a tax prepayment. A tax advisor can project your tax picture to determine if the AMT will apply. Turbo Tax and other tax preparation software can also be used to make the computations.

This situation has changed somewhat because of the 3.8% net investment income (NII) tax. Part of the state tax payment may be a "good" deduction for the NII tax even though there is no AMT benefit. See your tax advisor.

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Should you adopt an accounting policy for small equipment purchases by December 31, 2014?

An election is available to currently deduct small expenditures when the taxpayer doesn't have an applicable (audited) financial statement. Items up to $500 may be currently deducted, effective for amounts paid or incurred for tangible property after January 1, 2014, for taxable years beginning on or after January 1, 2014. The election doesn't apply for inventoriable costs.

Among other requirements, in order to qualify for the current deduction: at the beginning of the taxable year, the taxpayer must have accounting procedures treating as an expense for non-tax purposes - (1) amounts paid for property costing less than a specified dollar amount; or (2) amounts paid for property with an economic useful life of 12 months or less. The taxpayer must also treat the amount paid for the property as an expense on its books and records in accordance with the accounting procedures. The amount paid for the property may not exceed $500 per invoice or per item, as substantiated by the invoice.

Note the de minimus election will be made each year on the income tax return for the business.

In order to be in position to make the election for 2015, you must have the accounting policy in place by December 31, 2014 and implement that policy in your accounting throughout 2015. If you didn't have the policy for 2014, consider getting it in place by December 31, 2014. We recommend that the policy should be written.

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Do you need help with amended income tax returns?

We have already been meeting with folks who want a second look at their 2013 income tax returns for possible corrections. Call Dawn Siemer at 408-918-3162 on Mondays, Wednesdays or Fridays to make an appointment.

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Does your group need a speaker?

We are seeking opportunities to speak before groups. Topics include recent tax developments, tax issues relating to real estate, how estate planning has changed recently, tax issues relating to alternative investments using retirement accounts, and marketing topics such as "How I created a public access television show broadcast on eleven Bay Area stations." To make arrangements, call Michael Gray at 408-918-3161.

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Please share your good experiences with Michael Gray, CPA.

As you know, more and more people are going to the internet to find information about service providers. We hope you will share some good words about experiences that you have had with our firm. Some of the sites where you can share your experiences include yelp.com, siliconvalley.citysearch.com, and Google+.

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Financial Insider Weekly broadcast schedule for December and January.

Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 8:00 p.m., Pacific Time. You can watch it on Comcast channel 15 for San Jose and Campbell. The show is broadcast as streaming video at the same time at www.creatvsj.org.

Here are the scheduled interviews for December and January:

December 5 and 12, 2014, Deborah Price, Money Coach, The Money Coaching Institute, "The heart of money - a couples' guide to financial harmony"
December 19, 2014, Don Pollard, CLU, ChFC, Advanced Professionals, "Update on individual health insurance under Health Care Reform
December 26, 2014, Don Pollard, CLU, ChFC, Advanced Professionals, "Group medical insurance for small businesses"
January 2, 2015, Bettie Baker Marshall, attorney at law, "Legal considerations of caring for incapacitated relatives and friends"
January 9 and 16, 2015, Kate Levinson, "Emotional currency"
January 23, 2015, Peggy Martin, CLU, The Family Wealth Consulting Group, "Life insurance basics"
January 30, 2015, David Beck, CFP®, Bay Area Planners, "Financial aid for a college education"

Financial Insider Weekly is also broadcast as follows:

Back episodes available at https://www.youtube.com/user/financialinsiderweek.

Let me know any ideas that you have for topics or guests. Guests will usually have to be located in or near the Silicon Valley in California.

Hope you can watch or record the show. Please tell your friends about it!

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Questions and Answers

Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.

Dear readers:

Many of your questions relate to the sale of a principal residence. We have an article at our web site, "Could your residence be the ultimate tax shelter?" (www.realestateinvestingtax.com/residence.shtml) where you should be able to find the answers to most of these questions.

Many other questions relate to short sales and foreclosures. See our article on that subject at www.realestateinvestingtax.com/shortsale.shtml.

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Follow me on Twitter, Facebook, LinkedIn and Google+!

If you enjoy Twitter, please follow me at www.twitter.com/michaelgraycpa. I would especially appreciate retweets of our messages announcing episodes of Financial Insider Weekly.

you can also follow me on other social media sites, Facebook, LinkedIn, and Google+.

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If you have employee stock options, have you subscribed to Michael Gray, CPA's Option Alert at no charge or obligation?

To learn more, visit stockoptionadvisors.com/subscribe.shtml

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Check out my blog.

I have also started a blog at michaelgraycpa.com. Check it out!

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Do you know about our other newsletters?

For general tax developments, tax planning ideas, business development ideas and book reviews, subscribe to Michael Gray, CPA's Tax & Business Insight at taxtrimmers.com/subscribe2.shtml.

Have employee stock options? Subscribe to our free newsletter, Michael Gray, CPA's Option Alert! To learn more, visit stockoptionadvisors.com/subscribe.shtml.

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Introductory Offer Action Form

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If you would like to subscribe to our newsletter, fill out our form at http://www.realestatetaxletter.com, or email us at dgsiemer@taxtrimmers.com with "subscribe" as the subject. Be sure to include your name and email address.

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Michael Gray, CPA
2482 Wooding Ct.
San Jose, CA 95128
(408) 918-3162
FAX: (408) 938-0610
Hours: 8am - 5pm PDT Monday - Friday

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